Is Impact Investing the New ESG?

The “do-gooder” investment category known as ESG (Environmental, Social and Governance) has been facing backlash in recent years. Critics argue1 that ESG investing, which takes a company’s environmental, social, and governance policies into account, is vague and lacks oversight. They also say it is prone to greenwashing2, or an overstatement or misrepresentation of a company’s sustainability efforts. At the same time that some have been advocating for improved regulation by the Securities and Exchange Commission (SEC), others are resisting extraneous regulations. 50% of CEOs3 paused or reconsidered their ESG strategy in Q4 of 2022.

The flaws of ESG and the pushback against them are opening up more space in the investment landscape for impact investing4. Where ESG investing considers a company’s historical outcomes and policies regarding environmental, social, and governance factors, impact investing seeks to generate targeted future environmental and social benefits. 

Where ESG is inclusionary such that standards are used to inform portfolio development, impact investing is exclusionary whereby companies that do harm or produce no positive impact are excluded from portfolios. Similarly, while ESG is defined more by a company’s internal policies and practices, impact investing is defined by the external impact of the company’s products and services on the environment and society.

Incorporating ESG standards into portfolio development is often used as a risk mitigation strategy. Impact investing, on the other hand, takes account of a company’s positive and negative externalities1 in determining whether or not to invest. 

Because impact investing seeks an outcome beyond financial return, it is also arguably more measurable and transparent5 than ESG. How many solar panels did the company install? How many disadvantaged kids received scholarships? By how much did health outcomes improve for veterans? Impact investments are made with the expectation of having these specific questions answered.

Several years ago, the assumption was that one had to choose between doing good for the world and doing well financially, but that perception of impact investing is changing. Impact investing increased 68%1 from 2020 through 2022 and 88% of impact investors3 said in a 2021 survey that their investments were meeting or exceeding their financial expectations.

In an effort to offer investors a unique approach to impact investing, TrueShares partnered with RiverNorth to create the RiverNorth Patriot ETF (FLDZ), an actively managed impact fund with a specific objective, as evidenced by the fund’s name.

FLDZ does impact investing better by investing in mid to large cap US companies and donating the advisory profits and fees to the Folds of Honor Foundation, a charity focused on providing educational scholarships to the families of veterans and first responders who have been disabled or killed in action. FLDZ allows altruistic investors to keep their money stateside while knowing their money is going directly to an organization that will make an immediate, measurable, and essential impact for our community.